The Government Spending Multiplier at the Zero Lower Bound: Evidence from the United States

Mario Di Serio,Matteo Fragetta,Emanuel Gasteiger

doi:10.1111/obes.12382

Abstract

AbstractWe estimate state‐dependent government spending multipliers for the United States. We use a factor‐augmented interacted vector autoregression (FAIVAR) model. This allows us to capture the time‐varying monetary policy characteristics including the recent zero interest rate lower bound (ZLB) state, to account for the state of the business cycle and to address the limited information problem typically inherent in VARs. We identify government spending shocks by sign restrictions and use a government spending growth forecast series to account for the effects of anticipated fiscal policy. In our baseline specification, we find that government spending multipliers in a recession range from 3.56 to 3.79 at the ZLB. Away from the ZLB, multipliers in recessions range from 2.31 to 3.05. Several robustness analyses confirm that multipliers are higher, when the interest rate is lower and that multipliers in recessions exceed multipliers in expansions. Our results are consistent with theories that predict larger multipliers at the ZLB.

Highlights

How large is the government spending multiplier in normal times and how large is it when monetary policy is constrained by the zero interest rate lower bound (ZLB)? The
JEL Classification numbers: C32, E21, E32, E52, E62, H50 *We are grateful to the editor Francesco Zanetti, three anonymous referees, Efrem Castelnuovo, Lutz Kilian, Matthias Klein, our discussant Massimiliano Pisani and the participants of the 5th SIdE Workshop for PhD students in Econometrics and Empirical Economics organized by the Italian Econometric Association and Bank of Italy, the Verein fur Socialpolitik Annual Conference 2017 for many helpful comments
Consistent with our main results, the probabilities suggest that it is likely that the cumulative multipliers in a recession are higher than the ones in an expansion. These findings suggest that the choice of sign-restrictions that generated our main results is not crucial for our findings regarding the size of the government spending multiplier at the ZLB

Summary

Introduction

How large is the government spending multiplier in normal times and how large is it when monetary policy is constrained by the zero interest rate lower bound (ZLB)? The. We extend the literature by proposing an alternative framework to quantify the state-dependent government spending multiplier To this end, we use factor-augmented interacted vector autoregressive model with exogenous variables (FAIVAR-X) building on the interacted vector autoregression (IVAR) model in Towbin and Weber (2013) and Sa, Towbin and Wieladek (2014). We consider a FAIVAR specification, where we incorporate the forecasts errors based on growth in the forecast of government spending in the vector of endogenous variables This is an alternative way of addressing fiscal foresight. The paper proceeds as follows: section II outlines the FAIVAR-X model, our baseline specification and data, our inference and identification approach and how we calculate the multipliers; section III discusses the main results; section IV addresses robustness concerns; section V concludes

Methodology

Main results

Robustness

Findings

Conclusions